SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
Amendment No. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
Commission file number 033-80655
MOHEGAN TRIBAL GAMING AUTHORITY
(Exact name of registrant as specified in its charter)
Connecticut 06-1436334
(State or other jurisdiction of (IRS employer
incorporation or organization) Identification No.)
One Mohegan Sun Boulevard, Uncasville, CT 06382
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (860) 862-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
----- -----
Indicate by checkmark whether the registrant is an accelerated files (as
defined in Rule 12b-2 of the Exchange Act): Yes No X
----- -----
EXPLANATORY NOTE
The Mohegan Tribal Gaming Authority (the "Authority") has restated its financial
statements for the quarterly periods ended December 31, 2000, March 31, 2001,
June 30, 2001, December 31, 2001, March 31, 2002 and June 30, 2002 and for the
fiscal year ended September 30, 2001.
As more fully described in Note 9, this Form 10-Q/A includes in Item 1 of Part I
such restated financial statements and related notes thereto for quarter ended
December 31, 2000 and other information relating to such restated financial
statements. Item 2 of Part I also includes the Authority's amended and restated
discussion and analysis of financial condition and results of operations. Except
for Part I, Item 6 of Part II and the addition of the certifications required
under Sections 302 (as further described in Rule 15d-14 issued by the Securities
and Exchange Commission) and 906 of the Sarbanes-Oxley Act of 2002, no other
information included in the first amended report on Form 10-Q/A is amended by
this amendment. The information contained herein is as of December 31, 2000 and
does not reflect subsequent events except any that may have existed as of the
date of filing of the first amended Form 10-Q/A relating to such quarterly
period and which were disclosed therein. For information regarding additional
subsequent events, please refer to the Authority's Quarterly Reports on Forms
10-Q and 10-Q/A and Annual Reports on Forms 10-K and 10-K/A filed with respect
to periods after December 31, 2000.
MOHEGAN TRIBAL GAMING AUTHORITY
INDEX TO FORM 10-Q/A
PART I. FINANCIAL INFORMATION Page
Number
------
Item 1. Financial Statements.
Report of Independent Accountants by PricewaterhouseCoopers LLP. 1
Report of Independent Accountants by Arthur Andersen LLP. 2
Balance Sheets of Mohegan Tribal Gaming Authority as of December 31, 2000 3
(unaudited) and September 30, 2000.
Statements of Income of Mohegan Tribal Gaming Authority for the Quarters 4
Ended December 31, 2000 and 1999 (unaudited).
Statements of Changes in Capital of Mohegan Tribal Gaming Authority for the 5
Quarters Ended December 31, 2000 and 1999 (unaudited).
Statements of Cash Flows of Mohegan Tribal Gaming Authority for the Quarters 6
Ended December 31, 2000 and 1999 (unaudited).
Notes to Financial Statements of Mohegan Tribal Gaming Authority. 7-20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 21-32
Operations.
Item 3. Quantitative and Qualitative Disclosure of Market Risk. 32
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 34
Signatures. Mohegan Tribal Gaming Authority. 35
Certifications. 36-37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Mohegan Tribal Gaming Authority:
We have reviewed the accompanying balance sheet of the Mohegan Tribal Gaming
Authority ("the Authority") as of December 31, 2000 and the related statements
of income, of changes in capital and of cash flows for the quarter ended
December 31, 2000. These financial statements are the responsibility of the
Authority's management. The Authority's financial statements for the quarter
ended December 31, 1999 were reviewed by other independent accountants who have
ceased operations. Those independent accountants indicated that they were not
aware of any material modifications that should be made to those financial
statements for them to be in conformity with accounting principles generally
accepted in the United States in their report dated February 2, 2001.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements as of December 31, 2000
and for the quarter then ended for them to be in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 9 to the financial statements, the Authority has restated
its financial statements as of December 31, 2000 and for the quarter then ended,
previously reviewed by other independent accountants who have ceased operations.
/s/ PRICEWATERHOUSECOOPERS LLP
Hartford, CT
November 11, 2002
1
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP (ANDERSEN) AND HAS NOT BEEN REISSUED BY ANDERSEN.
REVIEW REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Mohegan Tribal Gaming Authority:
We have reviewed the accompanying balance sheet of the Mohegan Tribal Gaming
Authority (the "Authority") as of December 31, 2000*, and the related statements
of income, capital and cash flows for the three month periods ended December 31,
2000* and 1999. These financial statements are the responsibility of the
Authority's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquires of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, the objective
of which is the expression of an opinion regarding the financial statements as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the balance sheet of the Mohegan Tribal Gaming
Authority as of September 30, 2000, and the related statements of income (loss),
capital and cash flows for the year then ended (not presented separately herein)
and in our report dated December 1, 2000, we expressed an unqualified opinion on
those financial statements. In our opinion, the information set forth in the
accompanying balance sheet of the Mohegan Tribal Gaming Authority as of
September 30, 2000, is fairly stated, in all material respects, in relation to
the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP /S/
Hartford, Connecticut
February 2, 2001
* Subsequent to the date of this report, the Authority's balance sheet as of
December 31, 2000 and the related statements of income, of capital and of cash
flows for the quarter ended December 31, 2000 were reviewed by other independent
accountants whose report appears on page 1.
2
Mohegan Tribal Gaming Authority
Balance Sheets
(in thousands)
December 31,
2000 September 30,
(unaudited) 2000
------------- -------------
(restated - see note 9)
ASSETS
------
Current assets:
Cash and cash equivalents $ 68,544 $ 115,731
Receivables, net 7,128 5,490
Due from Tribe 6,283 1,648
Inventories 7,057 7,577
Other current assets 4,556 5,325
----------- ----------
Total current assets 93,568 135,771
Non-current assets:
Property and equipment, net 348,277 338,243
Construction in process 391,364 264,999
Trademark, net 122,269 123,128
Other assets, net 22,073 23,238
----------- ----------
Total assets $ 977,551 $ 885,379
=========== ==========
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of capital lease obligations $ 2,671 $ 4,055
Current portion of relinquishment liability 61,693 56,646
Accounts payable and accrued expenses 44,536 45,811
Construction payables 72,398 11,790
Accrued interest payable 21,250 10,625
----------- ----------
Total current liabilities 202,548 128,927
Non-current liabilities:
Long-term debt 500,000 500,000
Relinquishment liability, net of current portion 614,688 616,234
Capital lease obligations, net of current portion 1,650 2,336
Other long-term liabilities 1,216 -
----------- ----------
Total liabilities 1,320,102 1,247,497
----------- ----------
Commitments and contingencies (Note 7)
Capital:
Retained deficit (341,906) (362,118)
Accumulated other comprehensive loss (645) -
----------- ----------
Total capital (342,551) (362,118)
----------- ----------
Total liabilities and capital $ 977,551 $ 885,379
=========== ==========
The accompanying notes to the financial statements should be read
in conjunction with the financial statements.
3
Mohegan Tribal Gaming Authority
Statements of Income
(in thousands)
For the Quarter For the Quarter
Ended December 31, 2000 Ended December 31, 1999
(unaudited) (unaudited)
----------------------- -----------------------
(restated - see note 9)
Revenues:
Gaming $ 174,958 $ 164,925
Food and beverage 10,724 11,317
Retail, entertainment and other 16,595 15,452
------------ -----------
Gross revenues 202,277 191,694
Less - Promotional allowances (19,187) (18,383)
------------ ------------
Net revenues 183,090 173,311
------------ -----------
Operating costs and expenses:
Gaming 78,389 73,209
Food and beverage 6,078 6,008
Retail, entertainment and other 7,903 5,639
Marketing, general and administrative 39,437 34,417
Pre-opening costs and expenses 1,389 907
Management fees - 13,634
Depreciation and amortization 5,642 7,526
------------ -----------
Total operating costs and expenses 138,838 141,340
------------ -----------
Income from operations 44,252 31,971
------------ -----------
Other income (expense):
Accretion of relinquishment liability discount (Note 8) (8,958) (5,763)
Interest income 1,163 3,244
Other income, net 1 1
Interest expense, net of capitalized interest (Note 7) (6,054) (14,028)
------------ ------------
Total other income (expense) (13,848) (16,546)
------------ ------------
Income from continuing operations 30,404 15,425
Loss from discontinued operations (192) (266)
------------ ------------
Net income $ 30,212 $ 15,159
============ ===========
The accompanying notes to financial statements should be read
in conjunction with the financial statements.
4
Mohegan Tribal Gaming Authority
Statements of Changes in Capital
(in thousands)
For the Quarter For the Quarter
Ended December 31, 2000 Ended December 31, 1999
(unaudited) (unaudited)
----------------------- ---------------------------
(restated - see note 9)
Comprehensive Comprehensive
Capital Income Capital Income
----------- ------------- ------------ -------------
Retained deficit at October 1 $ (362,118) $ (458,052)
Net income 30,212 $ 30,212 15,159 $ 15,159
---------- ----------
Distributions to Tribe (10,000) (10,247)
----------- -----------
Retained deficit at December 31 (341,906) (453,140)
----------- -----------
Accumulated other comprehensive loss
at October 1 - -
Unrealized loss on derivative instruments - (645) - -
----------- ---------- ----------- ----------
Other comprehensive loss (645) (645) - -
----------- ---------- ----------- ----------
Comprehensive income $ 29,567 $ 15,159
========== ==========
Accumulated other comprehensive loss at
December 31 (645) -
----------- -----------
Total capital ending balance at December 31 $ (342,551) $ (453,140)
=========== ===========
The accompanying notes to financial statements should be read
in conjunction with the financial statements.
5
Mohegan Tribal Gaming Authority
Statements of Cash Flows
(in thousands)
For the Quarter For the Quarter
Ended December 31, 2000 Ended December 31, 1999
(unaudited) (unaudited)
----------------------- -----------------------
(restated - see note 9)
Cash flows provided by (used in) operating activities:
Net income $ 30,212 $ 15,159
Adjustments to reconcile net income to
net cash flow provided by operating activities:
Depreciation and amortization 5,642 7,526
Loss on disposition of assets - 138
Provision for losses on receivables 117 167
Accretion of relinquishment liability discount 8,958 5,763
Cash paid for accretion of relinquishment liability (2,881) -
discount
Change in fair value of derivative instruments 1,497 -
Amortization of debt issuance costs 980 -
Changes in operating assets and liabilities:
Increase in receivables and other assets (4,485) (1,078)
Increase (decrease) in accounts payable and accrued expenses 9,350 (11,406)
------------- -----------
Net cash flows provided by operating activities 49,390 16,269
------------- -----------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (14,805) (4,123)
Increase in construction in process, net of change in
construction payables of $60,608 and $0, respectively (65,757) (49,538)
------------- -----------
Net cash flows used in investing activities (80,562) (53,661)
------------- -----------
Cash flows provided by (used in) financial activities:
Distributions to Tribe (10,000) (10,247)
Principal portion of relinquishment liability payments (2,576) -
Payment on capital lease obligations (2,071) (3,032)
Capitalized financing fees (1,368) -
Defeasance trust asset - 135,507
Defeasance liability - (140,344)
------------- -----------
Net cash flows used in financing activities (16,015) (18,116)
------------- -----------
Net decrease in cash and cash equivalents (47,187) (55,508)
Cash and cash equivalents at beginning of period 115,731 276,598
------------- -----------
Cash and cash equivalents at end of period $ 68,544 $ 221,090
============= ===========
The accompanying notes to financial statements should be read
in conjunction with the financial statements.
6
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
The Mohegan Tribe of Indians of Connecticut (the "Tribe") established
the Mohegan Tribal Gaming Authority (the "Authority") in July 1995 with the
exclusive power to conduct and regulate gaming activities for the Tribe on
Tribal lands. On October 12, 1996, the Authority opened a casino known as the
Mohegan Sun Casino ("Mohegan Sun"). The Authority is governed by a nine-member
Management Board, consisting of the same nine members as those of the Tribal
Council (the governing body of the Tribe). Any change in the composition of the
Tribal Council results in a corresponding change in the Authority's Management
Board. The President and Chief Executive Officer and other senior officers of
Mohegan Sun are hired by the Management Board and are employees of the
Authority.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying unaudited financial statements have been prepared in
accordance with the accounting principles generally accepted in the United
States of America for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01,
the unaudited financial statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals and
adjustments) considered necessary for a fair presentation have been included.
For further information, refer to the financial statements and footnotes thereto
included in the Authority's annual report on Form 10-K for the year ended
September 30, 2000 filed with the Securities and Exchange Commission (the
"SEC").
Reclassifications
Certain amounts in the fiscal year 2000 financial statements have been
reclassified to conform to the fiscal year 2001 presentation.
New Accounting Pronouncements
On October 1, 2000 the Authority adopted Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), designated all derivative instruments as cash
flow hedging instruments and marked them to market. The impact of the adoption
of SFAS 133 was not material to the financial position of the Authority taken as
a whole. The Authority excludes the change in time value when assessing the
effectiveness of the hedging relationships. See Note 4.
NOTE 3 - DISCONTINUED OPERATIONS:
On November 29, 2000, the Authority discontinued bingo operations in
order to build the Hall of the Lost Tribes smoke-free slot machine venue.
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", the
financial statements of the Authority have been restated to reflect the
disposition of bingo operations as discontinued operations. Accordingly, the
revenues,
7
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
costs and expenses of bingo operations have been excluded from the captions in
the Statements of Income and have been reported as "Loss from discontinued
operations."
NOTE 4 - FINANCING FACILITIES:
Financing facilities, as described below, consisted of the following
(in thousands):
December 31, September 30,
2000 2000
---------------- ----------------
$200M 8 1/8% Senior Notes $ 200,000 $ 200,000
$300M 8 3/4% Senior Subordinated Notes 300,000 300,000
---------- ----------
$ 500,000 $ 500,000
========== ==========
Bank Credit Facility
On March 3, 1999, the Authority entered into a $425.0 million reducing,
revolving, collateralized credit facility (the "Bank Credit Facility"), with a
syndicate of lenders led by Bank of America N.A. (formerly known as Bank of
America National Trust and Savings Association), which will mature in March
2004. The Bank Credit Facility agreement provided the Authority the right to
arrange for increases in the Bank Credit Facility to an aggregate amount of
$500.0 million within two years subsequent to the closing. In November 1999, the
Bank Credit Facility was increased to $459.5 million. In November 2000, the
Authority exercised its right to increase the Bank Credit Facility to $500.0
million. The Authority plans to draw on the Bank Credit Facility primarily in
connection with the major expansion of Mohegan Sun, known as Project Sunburst,
and other capital expenditure projects. The Bank Credit Facility is
collateralized by a lien on substantially all of the Authority's assets, by a
leasehold mortgage on the land and improvements which comprise Mohegan Sun and
by each of the Authority's cash operating accounts. As of December 31, 2000,
there were no borrowings outstanding on the Bank Credit Facility.
At the Authority's option, each advance of loan proceeds will accrue
interest on the basis of a base rate or a one-month, two-month, three-month or
six-month London Inter-Bank Offered Rate ("LIBOR") plus, in either case, the
applicable spread (based on the Authority's Total Leverage Ratio, as defined in
the Bank Credit Facility). Interest on each LIBOR loan that is for a term of
three months or less shall be due and payable on the last day of the related
interest period. Interest on each LIBOR loan that is for a term of more than
three months is due and payable on the date which is three months after the date
such LIBOR loan was made and every three months thereafter and on the last day
of the related interest period. Interest on each base rate loan shall be due and
payable quarterly in arrears.
Pursuant to the terms of the Bank Credit Facility, the commitment (or
the maximum amount that may be borrowed under the Bank Credit Facility) will be
reduced automatically as of the earlier of March 31, 2002 or the last full day
of the first full fiscal quarter following the completion date of Project
Sunburst, and on the last day of each fiscal quarter thereafter, by 10% of the
commitment in effect immediately prior to the first such reduction.
Recent Amendment to the Bank Credit Facility
Effective November 30, 2000, the Authority amended certain financial
covenants and capital spending limitations of the Bank Credit Facility
agreement.
Financial Covenant Requirements
The Authority's debt agreements require, among other restrictions, the
maintenance of various financial covenants and terms including a fixed charge
coverage ratio and certain debt leverage ratios. As of December 31, 2000, the
Authority was in compliance with all financial covenant requirements.
8
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Derivative Instruments
The Authority uses derivative instruments, including an interest rate
cap, collar and swap in its strategy to manage interest rate risk associated
with the variable interest rates applicable to advances under the Bank Credit
Facility. The Authority's objective in managing interest rate risk is to ensure
appropriate income and sufficient liquidity to meet its obligations. The
Authority analyzes interest rate risk using various models that forecast cash
flows of the liabilities and their supporting assets, including derivative
instruments. The Authority does not believe that there is any material risk
exposure with respect to derivative or other financial instruments which it
currently holds. The Authority continually monitors these exposures and makes
the appropriate adjustments to manage these risks within management's
established limits.
The Authority is considered an "end user" of derivative instruments and
engages in derivative transactions for risk management purposes only. On October
1, 2000, the Authority adopted SFAS 133, designated all derivative instruments
as cash flow hedging instruments and marked them to market. The impact of the
adoption of SFAS 133 was not material to the financial position of the Authority
taken as a whole. The Authority excludes the change in time value when assessing
the effectiveness of the hedging relationships. All derivatives are evaluated
quarterly. The interest rate cap and interest rate swap listed below were deemed
to be effective at December 31, 2000. The interest rate collar listed below was
deemed to be ineffective at December 31, 2000.
Derivative instruments held by the Authority at December 31, 2000 are
as follows:
Estimated
Notional Fair
Value Cost Value
---------- -------- -----------
Interest Rate Cap
Strike Rate - 8% $2,647,400 $410,000 $ 10,000
Interest Rate Collar
Ceiling Strike Rate - 8%
Floor Strike Rate - 6% 451,267 295,000 (777,632)
Interest Rate Swap
Pay fixed - 6.35%
Receive Variable 225,633 221,000 (448,124)
---------- -------- -----------
Total $3,324,300 $926,000 ($1,215,756)
========== ======== ===========
All derivative instruments are based on one-month LIBOR. One-month
LIBOR was 6.56% on December 31, 2000.
In November 2000, the Authority modified the terms of its existing
interest rate collar and interest rate swap agreements. As result of the
modifications, the interest rate collar was deemed to be a net written option
that does not qualify for hedge accounting. The negative fair market value at
the date of modification of approximately $212,000 will be reclassified into
earnings as interest expense over the life of the original terms of the hedge
contract and future changes in the fair market value of the modified interest
rate collar will be recorded directly to earnings as a component of interest
expense. The Authority will reclassify approximately $73,000 of the negative
fair market value into earnings over the next twelve months. The modification of
the interest rate swap agreement did not change the Authority's assessment of
hedge effectiveness at December 31, 2000.
The aggregate fair market value change in all derivative instruments
was $2.1 million for the quarter ended December 31, 2000. In accordance with
SFAS 133, the Authority recorded $645,000 related to the unrealized loss on the
derivative instruments as a component of capital in the accompanying balance
sheets and recorded $1.5 million as interest expense in the accompanying for the
statements of income for the quarter ended December 31, 2000. The Authority held
no derivative instruments during the quarter ended December 31, 1999. As of
December 31, 2000, the fair market value of the Authority's derivative
instruments is included in other long-term liabilities in the accompanying
balance sheets. As of September 30, 2000, premiums paid for derivative
instruments were capitalized and are reflected in other assets in the
accompanying balance sheets.
9
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Senior Notes
On March 3, 1999, the Authority issued $200.0 million Senior Notes with
fixed interest payable at a rate of 8.125 % per annum (the "Senior Notes"). The
proceeds from this financing were used to extinguish or defease existing debt,
pay transaction costs and fund initial costs related to Project Sunburst.
Interest on the Senior Notes is payable semi-annually on January 1 and July 1.
The Senior Notes mature on January 1, 2006. The Senior Notes are
uncollateralized general obligations of the Authority and rank pari passu in
right of payment with all current and future uncollateralized senior
indebtedness of the Authority. Borrowings under the Bank Credit Facility and
other capital lease obligations are collateralized by first priority liens on
substantially all of the assets of the Authority. As a result, upon any
distribution to creditors in a bankruptcy, liquidation or reorganization or
similar proceeding relating to the Authority or the Tribe, the holders of
collateralized debt may be paid in full in cash before any payment may be made
with respect to the Senior Notes. The Senior Notes rank equally in right of
payment with 50% of the Authority's payment obligations under the Relinquishment
Agreement (See Note 8) that are then due and owing and rank senior to the
remaining 50% of the Authority's payment obligations under the Relinquishment
Agreement that are then due and owing and the $300 million 8.75% Senior
Subordinated Notes ("Senior Subordinated Notes"). As of December 31, 2000,
accrued interest on the Senior Notes was $8.1 million.
Senior Subordinated Notes
On March 3, 1999, the Authority issued $300 million Senior Subordinated
Notes with fixed interest payable at a rate of 8.75% per annum. The proceeds
from this financing were used to extinguish or defease existing debt, pay
transaction costs and fund initial costs related to Project Sunburst. Interest
on the Senior Subordinated Notes is payable semi-annually on January 1 and July
1. The Senior Subordinated Notes mature on January 1, 2009. The Senior
Subordinated Notes are uncollateralized general obligations of the Authority and
are subordinated to the Bank Credit Facility, the Senior Notes and in a
liquidation, bankruptcy or similar proceeding, 50% of the Authority's payment
obligations under the Relinquishment Agreement (See Note 8) that are then due
and owing. The Senior Subordinated Notes rank equally with the remaining 50% of
the Authority's payment obligations under the Relinquishment Agreement that are
then due and owing. As of December 31, 2000, accrued interest on the Senior
Subordinated Notes was $13.1 million.
Letters of Credit
The Authority has available a $250,000 uncollateralized letter of credit
with Fleet National Bank that expires on August 31, 2001 and a $1.0 million
letter of credit agreement with Bank of America that expires in April 2001. The
Authority maintains these letters of credit in order to satisfy potential
workers compensation liabilities that may arise. The Authority also had a
$250,000 letter of credit with Peoples Bank that expired on January 11, 2001. As
of December 31, 2000, no amounts were drawn on the letters of credit.
10
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Subordinated Notes/Defeasance Trust
The Authority had $90.0 million of subordinated financing from Sun
International and Waterford Gaming LLC in the form of subordinated notes
("Subordinated Notes"). Interest on the Subordinated Notes ranged from prime
plus 1.0% to 15.0%. Interest on the Subordinated Notes was payable semi-
annually, provided that all such interest was deferred and not paid until at
least half of the then existing secured notes ("Existing Notes") were offered to
be repurchased or retired, pursuant to the terms of the Existing Notes, and
certain other conditions. In March 1999, the Authority redeemed the Existing
Notes.
The Authority agreed to redeem the outstanding Subordinated Notes on
January 1, 2000, the first permitted redemption date, at a price of 100.0% of
the principal amount plus accrued and unpaid interest, less $500,000. To do
this, the Authority exercised its rights under the original purchase agreement
for the Subordinated Notes to affect a defeasance of the Subordinated Notes. The
Authority established a separate trust account with First Union National Bank,
the defeasance agent, in the form of U.S. Government securities, in an amount
that was estimated to be sufficient to redeem the Subordinated Notes plus
accrued interest on January 1, 2000. The Subordinated Notes of $140.3 million,
representing the outstanding principal balance of $90.0 million and accrued
interest of $50.3 million were tendered on December 30, 1999 two days prior to
the redemption date for year 2000 contingency purposes. The Authority had
reduced accrued interest by $500,000 to account for the gain on the
extinguishment of debt related to the tender of the Subordinated Notes. The
amounts reflected in the accompanying Statements of Cash Flows reflect the sale
of the assets in the defeasance trust and the payment of the defeasance
liability on December 30, 1999.
NOTE 5 - LEASES:
At December 31, 2000, the Authority was obligated under capital leases to
make future minimum lease payments as follows (in thousands):
11
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the fiscal year ending:
September 30, 2001 $ 2,178
September 30, 2002 2,357
September 30, 2003 65
---------
Total minimum lease payments 4,600
Amount representing interest (279)
---------
Total capital lease obligations 4,321
Less: Amount due within one year (2,671)
---------
Amount due after one year $ 1,650
=========
Operating lease expenses, excluding costs to obtain assets, were $902,000 for
the quarter ended December 31, 1999. No operating leases with terms of more than
one year existed during the quarter ended December 31, 2000.
NOTE 6 - RELATED PARTY TRANSACTIONS:
The Tribe provides governmental and administrative services to the
Authority in conjunction with the operation of Mohegan Sun. For the quarters
ended December 31, 2000 and 1999, expenses associated with these services were
$2.7 million and $2.3 million, respectively. The Tribe, through one of its
limited liability companies, has entered into various land lease agreements with
the Authority for access, parking and related purposes for Mohegan Sun. For each
of the quarters ended December 31, 2000 and 1999, expenses related to these
agreements totaled $84,000.
At December 31, 2000, amounts due from the Tribe of $6.3 million
relate to $5.9 million in payments made by the Authority on behalf of the Tribe
for the construction of certain utilities and the public safety facility that
will service the Mohegan Reservation. The Tribe anticipates obtaining tax-exempt
financing which will, among other things, be used to repay this advance. The
remainder of the amounts due from the Tribe are related to operational
receivables incurred in the normal course of business.
NOTE 7 - COMMITMENTS AND CONTINGENCIES:
Project Sunburst
The Authority has received authorization from the Tribe to expend up to
$960.0 million, excluding capitalized interest, for completion of Project
Sunburst. As of December 31, 2000, the Authority had incurred $392.3 million,
excluding capitalized interest, on Project Sunburst (and expects to incur an
additional $496.6 million for the remainder of fiscal year 2001). The remaining
$71.1 million is anticipated to be incurred during fiscal year 2002. As of
December 31, 2000, cumulative capitalized interest for Project Sunburst
construction expenses totaled $17.6 million. Capitalized interest totaled $7.2
million and $1.1 million for the quarters ended December 31, 2000 and 1999,
respectively.
The Mohegan Compact
In May 1994, the Tribe and the State of Connecticut entered into a
Memorandum of Understanding ("MOU") which sets forth certain matters regarding
implementation of the Mohegan Compact. The MOU stipulates that a portion of the
revenues earned on slot machines must be paid to the State of Connecticut ("Slot
Win Contribution"). The Slot Win Contribution payments will not be required if
the State of Connecticut legalizes any other gaming operations with slot
machines or other commercial casino table games within Connecticut, except those
consented to by the Tribe and the Mashantucket Pequot Tribe. For each 12-month
period commencing July 1, 1995, the Slot Win Contribution shall be the lesser of
(a) 30% of gross revenues from slot machines, or (b) the greater of (i) 25% of
gross revenues from slot machines or (ii) $80 million. For the quarters ended
December 31, 2000 and 1999, the Authority reflected expenses associated with
Slot Win Contribution totaling $33.0 million and $30.9 million, respectively. As
of December 31, 2000, outstanding Slot Win Contribution payments to the State of
Connecticut totaled $10.7 million.
12
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Town of Montville Agreement
On June 16, 1994, the Tribe and the Town of Montville (the "Town")
entered into an agreement whereby the Tribe agreed to pay to the Town a
recurring annual payment of $500,000 to minimize the impact to the Town
resulting from decreased tax revenues on reservation land held in trust.
Additionally, the Tribe agreed to make a one-time payment of $3.0 million
towards infrastructure improvements to the Town's water system. The Tribe
assigned its rights and obligations in this agreement to the Authority. As of
December 31, 2000, the Authority had fulfilled this obligation and paid $3.0
million to the Town of Montville for improvements to the municipal water system,
which has been included in other assets in the accompanying balance sheet and is
being amortized over 40 years.
Expansion Construction Management Agreement with Perini Building Company, Inc.
The Authority engaged Perini Building Company, Inc. ("Perini") as
construction manager to provide construction management services for Project
Sunburst. As construction manager, Perini is receiving a fee of $20.5 million
for services including, but not limited to, pre-construction review and
construction phase contract administration. As of December 31, 2000, Perini has
earned $10.1 million of the $20.5 million fee, of which $8.6 million has been
paid. This fee is included in construction in process in the accompanying
balance sheets. For each of the quarters ended December 31, 2000 and 1999, the
Authority incurred $1.5 million related to the Construction Management
Agreement. As of December 31, 2000, the Authority owed $1.5 million to Perini
related to the Construction Management Agreement.
Litigation
The Authority is a defendant in certain litigation incurred in the
normal course of business. In the opinion of management, based on the advice of
counsel, the aggregate liability, if any, arising from such litigation will not
have a material adverse effect on the Authority's financial position, results of
operations or cash flows.
NOTE 8 - TCA AGREEMENTS:
Management Agreement
Previously, the Tribe and Trading Cove Associates ("TCA") entered into
the Amended and Restated Gaming Facility Management Agreement (the "Management
Agreement"), pursuant to which the Tribe retained and engaged TCA, on an
independent contractor basis, to operate, manage and market Mohegan Sun. The
Tribe assigned its rights and obligations under the Management Agreement to the
Authority. TCA had a responsibility to manage Mohegan Sun in exchange for
payments ranging from 30% to 40% of net income, before management fees, as
defined, depending upon profitability levels. Management fees totaled $13.6
million for the quarter ended December 31, 1999. There were no management fees
for the quarter ended December 31, 2000 due to the termination of the Management
Agreement. (See discussion of Relinquishment Agreement below.)
Relinquishment Agreement
In February 1998, the Authority and TCA entered into an agreement (the
"Relinquishment Agreement"). Effective January 1, 2000 (the "Relinquishment
Date"), the Relinquishment Agreement superseded the Management Agreement. The
Relinquishment Agreement provides that the Authority is to make certain payments
to TCA out of, and determined as a percentage of, Revenues, as defined,
generated by Mohegan Sun over a 15-year period commencing on the Relinquishment
Date. The payments ("Senior Relinquishment Payments" and "Junior Relinquishment
Payments") have separate payment schedules and priority. Senior Relinquishment
Payments commenced on April 25, 2000, twenty-five days following the end of the
first three-month period following the Relinquishment Date, and continue at the
end of each three-month period occurring thereafter until January 25, 2015.
Junior Relinquishment Payments commenced on July 25, 2000, twenty-five days
following the end of the first six-month period following the Relinquishment
Date and continue at the end of each six-month period occurring thereafter until
January 25, 2015. Each Senior Relinquishment Payment and Junior Relinquishment
Payment is an amount equal to 2.5% of the Revenues generated
13
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
by Mohegan Sun over the immediately preceding three-month or six-month payment
period, as the case may be. "Revenues" are defined as gross gaming revenues
(other than Class II gaming revenue) and all other facility revenues (including,
without limitation, hotel revenues, room service, food and beverage sales,
ticket revenues, fees or receipts from the convention center, Mohegan Sun Arena
and all rental or other receipts from lessees and concessionaires, but not the
gross receipts of such lessees, licenses and concessionaires).
The Authority, in accordance with SFAS No. 5, "Accounting for
Contingencies", has recorded a relinquishment liability of the
estimated present value of its obligations under the Relinquishment Agreement. A
relinquishment liability of $549.1 million was established at September 30, 1998
based on the present value of the estimated future Mohegan Sun revenues
utilizing the Authority's risk free investment rate. At December 31, 2000, the
carrying amount of the relinquishment liability was $676.4 million as compared
to $672.9 million as of September 30, 2000. The increase is due to $9.0 million
in accretion of relinquishment liability discount, partially offset by $5.5
million in relinquishment payments. Of the $5.5 million in relinquishment
payments for the quarter ended December 31, 2000, $2.6 million represents
principal amounts, and the remaining $2.9 million is payment for the accretion
of interest. The accretion resulted from the impact on the discount for the time
value of money due to the passage of time. As of December 31, 2000,
relinquishment payments earned but unpaid were $15.6 million.
Development Agreement
On February 7, 1998, the Authority and TCA entered into a development
services agreement (the "Development Agreement"). Under the Development
Agreement, TCA is responsible for the administration and supervision of the
construction manager and the entire construction process of Project Sunburst.
TCA is acting as the Authority's representative in connection with construction
contracts that are approved by the Authority. Specifically, TCA is responsible
for overseeing all persons performing work on the expansion site, inspecting the
progress of construction, determining completion dates and reviewing contractor
payment requests submitted to the Authority.
Payment of the Development Fee
Under the Development Agreement, the Authority is required to pay to
TCA a development fee of $14.0 million. Pursuant to the payment schedule
described in the Development Agreement, on January 15, 2000, the Authority began
paying the development fee to TCA on a quarterly basis, based upon the
incremental completion as of each payment date. As of December 31, 2000, the
Authority had incurred $5.5 million related to the TCA development fee, of which
$4.9 million had been paid. For the quarters ended December 31, 2000 and 1999,
the Authority incurred $588,000 and $1.4 million, respectively, related to the
TCA development fee. All amounts incurred have been included in construction in
process in the accompanying balance sheets.
Termination and Disputes
The Development Agreement terminates upon the earlier of (a) completion
of Project Sunburst or (b) February 7, 2008. In addition, each party has the
right to terminate the Development Agreement if there is a material default or
failure to perform a material duty or obligation by the other party. The parties
must submit disputes arising under the Development Agreement to arbitration and
have agreed that punitive damages may not be awarded to either party by an
arbitrator. The Authority has also waived sovereign immunity for the purpose of
permitting, compelling or enforcing arbitration and has agreed to be sued by TCA
in any court of competent jurisdiction for the purposes of compelling
arbitration or enforcing any arbitration or judicial award arising out of the
Development Agreement.
NOTE 9 - RESTATEMENT AND RECLASSIFICATIONS:
The Authority has restated its financial statements for the quarter
ended December 31, 2000 to reflect the effects of the following adjustments:
(i) to record additional capitalized interest pertaining to Project Sunburst in
accordance with SFAS No. 34, "Capitalization of Interest Cost" (ii) to record
Project Sunburst related capital expenditures incurred in the quarter ended
December 31, 2000, (iii) to record depreciation expense associated with placing
additional fixed assets in service prior to December 31, 2000, and (iv) to
record adjustments necessary to account for the Authority's derivative
instruments in accordance with SFAS 133. The aggregate effect of recording these
adjustments resulted in the Authority increasing its net income by $3.0 million
for the quarter ended December 31, 2000, and increasing its total assets by
$61.1 million as of December 31, 2000.
14
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
In addition, the Authority also has reclassified certain other costs,
expenses and balances in the financial statements. These reclassifications have
no effect on the authority's net income.
The financial statements as of and for the quarter ended December 31,
2000 contained herein have been updated to reflect these restatements and
reclassifications. The following tables summarize the impact of these
adjustments on the Authority's financial statements, as restated (in thousands):
15
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Mohegan Tribal Gaming Authority
Condensed Balance Sheet
(in thousands)
Previously
Reported Restatement Restated
December 31, 2000* Reclassifications Adjustments December 31, 2000
----------------- ----------------- ----------- -----------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 68,544 $ - $ - $ 68,544
Receivables, net 8,702 (1,574) a,b - 7,128
Due from Tribe 5,854 429 a - 6,283
Inventories 7,057 - - 7,057
Other current assets 3,411 1,145 b - 4,556
----------- ---------- ----------- ------------
Total current assets $ 93,568 $ - $ - $ 93,568
Non-current assets:
Property and equipment, net 338,145 - 10,132 f,g 348,277
Construction in process 341,588 - 49,776 f,h,i 391,364
Trademark, net 122,269 - - 122,269
Other assets, net 20,857 1,216 c - 22,073
----------- ---------- ----------- ------------
Total assets $ 916,427 $ 1,216 $ 59,908 $ 977,551
=========== ========== =========== ============
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of capital lease
obligations $ 2,671 $ - $ - $ 2,671
Current portion of relinquishment liability 61,630 63 d - 61,693
Accounts payable and accrued expenses 59,331 (14,795) e - 44,536
Construction payables - 14,795 57,603 i 72,398
Accrued interest payable 21,250 - - 21,250
----------- ---------- ----------- ------------
Total current liabilities 144,882 63 57,603 202,548
Non-current liabilities:
Long-term debt 500,000 - - 500,000
Relinquishment liability, net of current portion 614,751 (63) d - 614,688
Capital lease obligations, net of
current portion 1,650 - - 1,650
Other long-term liabilities - 1,216 c - 1,216
----------- ---------- ----------- ------------
Total liabilities 1,261,283 1,216 57,603 1,320,102
----------- ---------- ----------- ------------
Capital
Retained deficit (344,856) - 2,950 g,h,j (341,906)
Accumulated other comprehensive loss - - (645) j (645)
----------- ---------- ----------- ------------
Total capital (344,856) - 2,305 (342,551)
----------- ---------- ----------- ------------
Total liabilities and capital $ 916,427 $ 1,216 $ 59,908 $ 977,551
=========== ========== =========== ============
*Previously reported in Form 10-Q/A filed by the Authority on February 14, 2001.
See page 20 of the notes to the Authority's financial statements for the
footnotes to this restatement schedule.
16
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Mohegan Tribal Gaming Authority
Condensed Statement of Income
(in thousands)
Previously
Reported Restated
for the Quarter for the Quarter
Ended Ended
December 31, Restatement December 31,
2000* Reclassifications Adjustments 2000
--------------- ------------------ --------------- ----------------
Revenues:
Net revenues $ 183,090 $ - $ - 183,090
----------- ----------- ------------ ------------
Operating costs and expenses:
Gaming 78,389 - - 78,389
Food and beverage 6,078 - - 6,078
Retail, entertainment and other 5,835 2,068 k - 7,903
Marketing, general and administrative 41,505 (2,068) k - 39,437
Pre-opening costs and expenses 1,389 - - 1,389
Depreciation and amortization 6,579 (980) l 43 g 5,642
----------- ----------- ------------ ------------
Total operating costs and expenses 139,775 (980) 43 138,838
----------- ----------- ------------ ------------
Income from operations 43,315 980 (43) 44,252
----------- ----------- ------------ ------------
Other income (expense):
Relinquishment liability reassessment (8,958) 8,958 m - -
Accretion of relinquishment liability
discount - (8,958) m - (8,958)
Interest income 1,164 (1) n - 1,163
Other income, net - l n - 1
Interest expense, net of capitalized
interest (5,925) (980) l 851 h,j,o (6,054)
Change in fair value of derivative
instruments (2,142) - 2,142 o -
----------- ----------- ------------ ------------
Total other income (expense) (15,861) (980) 2,993 (13,848)
----------- ----------- ------------ ------------
Income from continuing operations 27,454 - 2,950 30,404
Loss from discontinued operations (192) - - (192)
----------- ----------- ------------ ------------
Net income $ 27,262 $ - $ 2,950 $ 30,212
=========== =========== =========== ============
* Previously reported in Form 10-Q/A filed by the Authority on February 14,
2001.
See page 20 of the notes to the Authority's financial statements for the
footnotes to this restatement schedule.
17
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Mohegan Tribal Gaming Authority
Condensed Statement of Changes in Capital
(in thousands)
Previously
Reported Restated
For the For the
Quarter Ended Restatement Quarter Ended
December 31, 2000* Adjustments December 31, 2000
------------------ ----------------------- -------------------------
Comprehensive Comprehensive
Capital Income Capital Income
------- ------------- ------- -------------
Retained deficit at October 1 $ (362,118) $ - $ - $(362,118) $ -
Net income 27,262 2,950 2,950 g,h,j 30,212 30,212
------ ----- ---------
Distributions to Tribe (10,000) (10,000)
----------- ---------
Retained deficit at December 31 (344,856) 2,950 (341,906)
----------- ------ ---------
Accumulated other comprehensive loss at October 1 - - -
Unrealized loss on derivative instruments - (645) j (645)
------ ---------
Other comprehensive loss - (645) (645) (645) (645)
------ ------ --------- ---------
Comprehensive income $2,305 $ 29,567
----------- ====== =========
Accumulated other comprehensive loss at December 31 - (645) (645)
----------- ------ ---------
Total capital ending balance at December 31 $ (344,856) $ 2,305 $(342,551)
=========== ======= =========
* Previously reported in Form 10-Q/A filed by the Authority on February 14,
2001.
See page 20 of the notes to the Authority's financial statements for the
footnotes to this restatement schedule.
18
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Mohegan Tribal Gaming Authority
Condensed Statement of Cash Flows
(in thousands)
Previously
Reported Restated
For the For the
Quarter Ended Restatement Quarter Ended
December 31, 2000* Reclassifications Adjustments December 31, 2000
-------------------- ----------------- ------------- -----------------
Cash flows provided by (used in) operating activities:
Net income $ 27,262 $ - 2,950 g,h,j $ 30,212
Adjustments to reconcile net income to
net cash flow provided by operating activities:
Depreciation and amortization 6,579 (980) q 43 g 5,642
Provision for losses on receivables 117 - - 117
Accretion of relinquishment liability discount - 8,958 r - 8,958
Cash paid for accretion of relinquishment
liability discount - (2,881) p - (2,881)
Relinquishment liability reassessment 8,958 (8,958) r - -
Decrease in fair value of derivative instruments - 2,142 s (645) j 1,497
Amortization of debt issuance costs - 980 q - 980
Changes in operating assets and liabilities:
Increase in receivables and other assets (2,343) (2,142) s - (4,485)
Increase (decrease) in accounts payable and
accrued expenses 12,355 (3,005) t - 9,350
--------- -------- -------- ------------
Net cash flows provided by operating activities 52,928 (5,886) 2,348 49,390
--------- -------- -------- ------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (4,630) - (10,175) f (14,805)
Increase in construction in process, net of change in
construction payables (76,589) 3,005 t 7,827 f,h (65,757)
--------- -------- -------- ------------
Net cash flows used in investing activities (81,219) 3,005 (2,348) (80,562)
--------- -------- -------- ------------
Cash flows provided by (used in) financing activities:
Distributions to Tribe (10,000) - - (10,000)
Principal portion of relinquishment payments (5,457) 2,881 p - (2,576)
Payment on capital lease obligations (2,071) - - (2,071)
Capitalized financing fees (1,368) - - (1,368)
--------- -------- -------- ------------
Net cash flows used in financing activities (18,896) 2,881 - (16,015)
--------- -------- -------- ------------
Net decrease in cash and cash equivalents (47,187) - - (47,187)
Cash and cash equivalents at beginning of period 115,731 - - 115,731
--------- -------- -------- ------------
Cash and cash equivalents at end of period $ 68,544 $ - $ - $ 68,544
========= ======== ======== ============
* Previously reported in Form 10-Q/A filed by the Authority on February 14,
2001.
See page 20 of the notes to the Authority's financial statements for the
footnotes to this restatement schedule.
19
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Adjustment footnotes (in thousands):
a. Reclassified an amount due from the Tribe of $429 from receivables, net to
due from Tribe.
b. Reclassified an amount pertaining to Deferred Compensation Plan assets of
$1,145 from receivables, net to other current assets.
c. Reclassified $1,216 loss on derivative instruments held by the Authority at
December 31, 2000 from other assets, net to other long-term liabilities.
d. Reclassified long-term relinquishment liability of $63 to current portion
of relinquishment liability.
e. Reclassified construction related payables of $14,795 from accounts payable
and accrued expenses to construction payables.
f. Reclassified utilities facility costs of $10,175 from construction in
process to property and equipment, net.
g. Recorded depreciation of $43 on additional utilities facility costs
capitalized and placed into service in the quarter ended December 31, 2000.
h. Recorded additional capitalized interest pertaining to Project Sunburst of
$2,348 for the quarter ended December 31, 2000.
i. Recorded an accrual for construction payables of $57,603 pertaining to
Project Sunburst for work completed by December 31, 2000, but paid
subsequent to December 31, 2000.
j. In accordance with SFAS 133, recorded $645 adjustment to reflect the
unrealized loss on derivative instruments.
k. Reclassified expenditures from marketing, general and administrative to
retail, entertainment and other.
l. Reclassified amortization of debt issuance costs of $980 from depreciation
and amortization to interest expense, net of capitalized interest.
m. Reclassified relinquishment liability reassessment of $8,958 to accretion
of relinquishment liability discount.
n. Reclassified $1 from interest income to other income, net.
o. Reclassified $2,142 to change in fair value of derivative instruments to
interest expense, net of capitalized interest.
p. Reclassified cash paid for accretion of relinquishment liability discount
as principal portion of relinquishment payments.
q. Reclassified $980 from depreciation and amortization to amortization of
debt issuance costs.
r. Reclassified the relinquishment liability reassessment as accretion of
relinquishment liability discount.
s. Reclassified from decrease in receivables and other assets decrease in fair
value of derivative instruments.
t. Reclassified change in construction payables to increase in construction in
process from increase (decrease) in accounts payable and accrued expenses.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the Authority's financial statements and the related notes beginning on page 3
of this Form 10-Q/A which has been updated to reflect the restatements and
reclassifications more fully described in Note 9 to the Authority's financial
statements.
Forward Looking Statements
Some information included in this Amended Quarterly Report and other
materials filed by the Authority with the Securities and Exchange Commission
contain forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements include information relating to plans for future expansion and
other business development activities, as well as other capital spending,
financing sources and the effects of regulation (including gaming and tax
regulation) and competition. These statements can sometimes be identified by our
use of forward-looking words such as "may," "will," "anticipate," "estimate,"
"expect," or "intend" and similar expressions. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ
materially from those expressed in any forward-looking statements made by or on
behalf of the Authority. These risks and uncertainties include, but are not
limited to, those relating to development and construction activities,
dependence on existing management, leverage and debt service, domestic or global
economic conditions, pending litigation, changes in federal tax laws or the
administration of such laws and changes in gaming laws or regulations (including
the legalization of gaming in certain jurisdictions). Additional information
concerning potential factors that could affect the Authority's financial results
are included in the Authority's Annual Reports on Forms 10-K for the fiscal year
ended September 30, 2000, as well as the Authority's other reports and filings
with the SEC. The forward-looking statements included in this Quarterly Report
on Form 10-Q/A are made only as of the date of this report. The Authority does
not have and the Authority does not undertake any obligation to publicly update
any forward-looking statements to reflect subsequent events or circumstances.
The Authority can not assure you that projected results or events will be
achieved.
Overview
The Tribe and the Authority
The Tribe is a federally recognized Indian tribe with an approximately
390-acre reservation situated in southeastern Connecticut. Under the Indian
Gaming Regulatory Act, federally recognized Indian tribes are permitted to
conduct full-scale casino gaming operations on tribal land, subject to, among
other things, the negotiation of a gaming compact with the state in which they
operate. The Tribe and the State of Connecticut have entered into such a compact
that has been approved by the United States Secretary of the Interior. The
Tribe's gaming operation is one of only two legally authorized gaming operations
in New England offering traditional slot machines and table games. The Tribe has
established an instrumentality, the Authority, with the exclusive power to
conduct and regulate gaming activities on the existing reservation of the Tribe
located adjacent to Uncasville, Connecticut. The Authority is governed by a
Management Board, consisting of the same nine members of the Mohegan Tribal
Council.
Mohegan Sun
In October 1996, the Authority opened a gaming and entertainment complex
known as Mohegan Sun. Mohegan Sun is situated in southeastern Connecticut on a
240-acre site on the Tribe's reservation overlooking the Thames River with
direct access from Routes I-395 and 2A via a four-lane access road constructed
by the Authority. As of December 31, 2000, Mohegan Sun had parking spaces for
approximately 7,500 guests and 2,700 employees. Mohegan Sun is located
approximately 125 miles from New York City and approximately 100 miles from
Boston, Massachusetts. The Authority began construction in 1999 of a major
expansion of Mohegan Sun known as Project Sunburst. The first phase of Project
Sunburst, the Casino of the Sky, will include increased gaming, restaurant and
retail space and an entertainment arena. The remaining components will include a
1,200-room luxury hotel and approximately 100,000 square feet of convention
space.
21
Mohegan Sun operates in an approximately 635,000 square foot facility,
which at December 31, 2000, includes the following:
. approximately 3,031 slot machines, 153 table games (including
blackjack, roulette, craps and baccarat) and 42 poker tables;
. food and beverage amenities, including three full-service themed
fine dining restaurants, a 610-seat buffet, a New York style
delicatessen, a 24-hour coffee shop, a ten-station food court
featuring international and domestic cuisine and multiple service
bars;
. an approximately 10,000 square foot, 350-seat lounge featuring
live entertainment seven days a week;
. an approximately 9,000 square foot simulcasting race book
facility;
. six retail shops providing shopping opportunities ranging from
Mohegan Sun logo souvenirs to clothing to cigars;
. arcade-style recreation area and a child care facility operated
by New Horizons Kids Quest; and
. a 4,000 square foot, 16-pump gasoline service station and
convenience store.
Explanation of Key Financial Statement Captions
Gross revenues. The Authority's gross revenues are derived mostly from
the following three sources:
. Gaming revenues, which include revenues from slot machines, table
games, poker and racebook;
. Food and beverage sales; and
. Retail, entertainment and other revenues, which include revenues
from the Mohegan Sun managed retail outlets.
The table below summarizes the Authority's percentage of gross revenues
from each of these sources:
For the For the
Quarter Ended Quarter Ended
December 31, 2000 December 31, 1999
------------------- -------------------
Gaming 87% 86%
Food and beverage 5% 6%
Retail, entertainment and other 8% 8%
--------- ---------
Total 100% 100%
========= =========
Slot win. Gross slot win represents all amounts played in the slot
machines reduced by both (1) the winnings paid out and (2) all amounts deposited
by the Authority into the slot machines to ensure sufficient coins in each
machine to pay out the winnings. Progressive slot machines retain some of each
amount wagered and aggregate these amounts with similar amounts from other slot
machines in order to create one-time winnings that are substantially larger than
those paid in the ordinary course. The Authority refers to such aggregated
amounts as progressive jackpots. In-house progressive jackpot amounts are
accrued by the Authority until paid and such accrued amounts are deducted from
gross slot win to arrive at net slot win. Wide-area progressive jackpot amounts
are paid by a third-party vendor, and the Authority remits a weekly payment to
the vendor, which is deducted from gross slot win.
22
Casino revenues and promotional allowances. The Authority recognizes
casino revenue as gaming wins less gaming losses. Revenues from food and
beverages, retail, entertainment and other services are recognized at the time
the service is performed. The Authority operates the Mohegan Sun complimentary
program in which food, beverages, retail, entertainment and other services are
provided to guests based on points that are earned through the Mohegan Sun
Player's Club. The retail value of these complimentary items is included in
gross revenue and then deducted as promotional allowances, except for the
redemption from a catalog program, the Sun Select Catalog, which includes
vacations, electronics and gift items, to arrive at net revenues. The estimated
cost of providing these promotional allowances is charged to the casino
department in the following amounts (in thousands):
For the For the
Quarter Ended Quarter Ended
December 31, 2000 December 31, 1999
-------------------- --------------------
Food and beverage $ 6,367 $ 6,512
Retail, entertainment and other 7,436 7,353
------------- -------------
Total 13,803 13,865
============= =============
Mohegan Sun Player's Club. The Mohegan Sun Player's Club is a voluntary
program, without membership fees, which awards points to members based on their
gaming activities. These points may be used to purchase items at restaurants and
retail outlets located within Mohegan Sun, the Mohegan Sun gasoline and
convenience center and the Sun Select Catalog, as well as to purchase tickets to
entertainment events held at the Mohegan Sun facilities. The Authority accrues
for Player's Club points expected to be redeemed in the future based on the
average cost to the Authority of items expected to be redeemed and includes the
related cost in marketing, general and administrative in the Authority's income
statement.
Gaming expenses. Gaming expenses primarily include the Slot Win
Contribution which the Authority is required to pay to the State of Connecticut,
expenses associated with slot operations and table games, poker and racebook
expenses and promotional expenses for the redemption of the Mohegan Sun Player's
Club points and the Sun Select Catalog.
EBITDA and Adjusted EBITDA. EBITDA represents earnings before interest,
income taxes, depreciation and amortization. The EBITDA margin is calculated as
EBITDA as a percentage of net revenue. Adjusted EBITDA represents further
adjustments to EBITDA to remove the effects of pre-opening costs and expenses,
accretion of relinquishment liability discount on the relinquishment liability
to Trading Cove Associates ("TCA") pursuant to the Relinquishment Agreement,
management fees payable to TCA pursuant to the Management Agreement,
discontinued operations and non-operating income/expense. The Adjusted EBITDA
margin is calculated as Adjusted EBITDA as a percentage of net revenue. Adjusted
EBITDA should not be considered as an alternative to any measure of performance
as promulgated under accounting principles generally accepted in the United
States of America (such as operating income or net income), nor should it be
considered as an indicator of the Authority's overall financial performance. The
Authority's calculation of Adjusted EBITDA is likely to be different from the
calculation of EBITDA or similar measurements used by other companies and
therefore comparability may be limited. EBITDA and Adjusted EBITDA are computed
as follows (in thousands):
23
For the For the Quarter
Quarter Ended Ended December
December 31, 2000 31, 1999
----------------------- ----------------
(restated - see note 9 to
the Authority's
financial statements)
EBITDA
Net income $ 30,212 $ 15,159
Add back:
Interest expense, net of capitalized
interest 6,054 14,028
Interest income (1,163) (3,244)
Income taxes - -
Depreciation and amortization 5,642 7,526
---------- ------------
EBITDA $ 40,745 $ 33,469
---------- ------------
EBITDA Margin 22.3% 19.3%
Adjustments to EBITDA to
reconcile to Adjusted EBITDA
Pre-opening costs and expenses $ 1,389 $ 907
Accretion of relinquishment liability
discount 8,958 5,763
Management fees - 13,634
Other income, net (1) (1)
Discontinued operations 192 266
---------- ------------
Adjusted EBITDA $ 51,283 $ 54,038
========== ============
Adjusted EBITDA Margin 28.0% 31.2%
Accretion of relinquishment liability discount and reassessment of
relinquishment liability. The Authority stopped paying management fees to
TCA due to the termination of the Management Agreement and began recognizing
amounts due under the Relinquishment Agreement beginning January 1, 2000. Under
the Management Agreement, TCA was responsible for the day-to-day management,
operation and maintenance of Mohegan Sun. The Management Agreement authorized
TCA to pay itself a management fee in monthly installments based on 30% to 40%
of net income, before management fees, as defined in the Management Agreement,
depending on profitability levels. Under the Relinquishment Agreement, the
Authority and TCA agreed to terminate the Management Agreement with TCA on
January 1, 2000. To compensate TCA for terminating its management rights, the
Authority agreed to pay to TCA five percent of the revenues, as defined in the
Relinquishment Agreement, generated by Mohegan Sun (including Project Sunburst)
during the 15-year period commencing on January 1, 2000 and ending on December
31, 2014.
The Authority has recorded a relinquishment liability of the estimated
present value of its obligations under the Relinquishment Agreement. The
relinquishment liability is reassessed when necessary to account for material
increases or decreases in projected revenues and quarterly to reflect the
impact on the time value of money due to the passage of time. In addition, the
Authority has capitalized $130.0 million of this relinquishment liability in
connection with the trademark value of the Mohegan Sun brand name. The Authority
has recognized amortization associated with the $130.0 million trademark of
$859,000 and $1.7 million for the quarters ended December 31, 2000 and 1999,
respectively. See Note 8 to the Authority's financial statements beginning on
page 3 for a further discussion of how the relinquishment liability and related
reassessments are calculated.
Results of Operations
Comparison of Operating Results for the Quarters Ended December 31, 2000
and 1999:
Net revenues for the quarter ended December 31, 2000 increased by $9.8
million, or 5.6%, to $183.1 million from $173.3 million reported for the same
period of the prior year. This increase primarily is attributable to an increase
in gaming revenues.
24
Adjusted EBITDA for the quarter ended December 31, 2000 decreased by
$2.8 million, or 5.1%, to $51.3 million from $54.0 million for the quarter ended
December 31, 1999. Mohegan Sun achieved a 28.0% Adjusted EBITDA margin for the
quarter ended December 31, 2000 compared to a 31.2% Adjusted EBITDA margin for
the quarter ended December 31, 1999. The decline in margin is the result of
marketing, general and administrative expenses increasing at a greater rate
than revenues.
The Connecticut slot market grew at a rate of 2.8% for the quarter ended
December 31, 2000 as compared to the quarter ended December 31, 1999. The State
of Connecticut reported a gross slot win of $309.6 million and $301.1 million
for the quarters ended December 31, 2000 and 1999, respectively. Mohegan Sun
exceeded the market's growth in slot win as it experienced an increase in gross
slot revenues of 6.9% in the quarter ended December 31, 2000 over the quarter
ended December 31, 1999. Gross slot revenues were $132.0 million and $123.5
million for the quarters ended December 31, 2000 and 1999, respectively. Gross
slot win per unit per day was $473 and $444 for the respective periods.
Gaming revenues for the quarter ended December 31, 2000 increased by
$10.0 million, or 6.1%, to $175.0 million from $164.9 million for the quarter
ended December 31, 1999. This increase in gaming revenues is due to a 5.8%
growth in net slot machine revenues and a 7.5% increase in table game revenues.
Food and beverage revenues for the quarter ended December 31, 2000
decreased by $593,000, or 5.2%, to $10.7 from $11.3 million for the quarter
ended December 31, 1999. This decrease is attributable principally to a 4.0%
decrease in meals served for the quarter ended December 31, 2000 as compared to
the same period in the prior year.
Retail, entertainment and other revenues for the quarter ended December
31, 2000 increased by $1.1 million, or 7.4%, to $16.6 million from $15.5 million
for the quarter ended December 31, 1999. Of the $1.1 million increase in retail,
entertainment and other revenues, $878,000 is attributable to the increased
sales at the Mohegan Sun gasoline and convenience center.
Promotional allowances for the quarter ended December 31, 2000
increased by $804,000, or 4.4%, to $19.2 million from $18.4 million for the
quarter ended December 31, 1999. This increase is attributable primarily to
increased redemption of Mohegan Sun Player's Club points by patrons. Promotional
allowances as a percentage of gaming revenues were 11.0% and 11.1% for the
quarters ended December 31, 2000 and 1999, respectively.
Total operating costs and expenses for the quarter ended December 31,
2000 decreased by $2.5 million, or 1.8%, to $138.8 million from $141.3 million
for the quarter ended December 31, 1999. This decrease is due to the elimination
of management fees as a result of the termination of the Management Agreement
effective January 1, 2000, partially offset by increases in gaming and
marketing, general and administrative costs.
Gaming costs and expenses for the quarter ended December 31, 2000
increased by $5.2 million, or 7.1%, to $78.4 million from $73.2 million for the
quarter ended December 31, 1999. The Slot Win Contribution totaled $33.0 million
and $30.9 million for the quarters ended December 31, 2000 and 1999,
respectively. The Slot Win Contribution increase of $2.1 million, or 6.9%, over
the same period in the prior year is attributable directly to the $7.1 million,
or 5.8%, increase in net slot revenues. The balance of the growth in gaming
costs and expenses is attributable to an increase in the quality of food and
beverage complimentaries offered in the premium player lounges and increased
labor and benefit costs. Gaming costs and expenses as a percentage of gaming
revenues were 44.8% in the quarter ended December 31, 2000 compared to 44.4% in
the same period of the prior year.
Food and beverage costs and expenses for the quarter ended December 31,
2000 increased by $70,000, or 1.2%, to $6.1 million from $6.0 million for the
quarter ended December 31, 1999. This increase is attributable primarily to
increased labor and benefit costs.
Retail, entertainment and other costs and expenses for the quarter ended
December 31, 2000 increased by $2.3 million, or 40.1%, to $7.9 million from $5.6
million for the quarter ended December 31,1999. This increase is attributable
primarily to the shift of complimentary point redemption from food and beverage
to retail outlets and the Mohegan Sun gasoline and convenience center.
25
Marketing, general and administrative costs and expenses for the quarter
ended December 31, 2000 increased by $5.0 million, or 14.6%, to $39.4 million
from $34.4 million for the quarter ended December 31, 1999. This increase is
attributable to continued advertising campaigns. Management believes advertising
programs have driven incremental patronage, expanding Mohegan Sun's brand
awareness and market share.
Pre-opening costs and expenses for the quarter ended December 31, 2000
increased by $482,000, or 53.1%, to $1.4 million from $907,000 for the quarter
ended December 31, 1999. Pre-opening costs and expenses are composed primarily
of pre-opening labor and marketing costs associated with the Project Sunburst
expansion.
TCA did not receive management fees for the quarter ended December 31,
2000, as a result of the termination of the Management Agreement on January 1,
2000. Management fees earned by TCA totaled $13.6 million for the quarter ended
December 31, 1999.
Depreciation and amortization for the quarter ended December 31, 2000
decreased by $1.9 million, or 25.0%, to $5.6 million from $7.5 million for the
quarter ended December 31, 1999. This decrease is attributable primarily to the
acceleration of the trademark amortization in the prior year of $859,000.
Income from operations for the quarter ended December 31, 2000
increased by $12.3 million, or 38.4%, to $44.3 million from $32.0 million for
the quarter ended December 31, 1999. This increase in income from operations is
attributable primarily to the $9.8 million increase in net revenues combined
with a $13.6 million decrease in management fees. The increase in income from
operations is offset partially by increases in gaming and marketing, general and
administrative costs and expenses of $5.2 million and $5.0 million,
respectively.
Accretion of relinquishment liability discount for the quarter ended
December 31, 2000 increased by $3.2 million, or 55.4%, to $9.0 million from $5.8
million for the quarter ended December 31, 1999. This increase is due to the
Authority's quarterly accretion of the liability to reflect the impact of the
time value of money due to the passage of time.
Interest income for the quarter ended December 31, 2000 decreased by
$2.1 million, or 64.1%, to $1.2 million from $3.2 million for the quarter ended
December 31, 1999. This decrease in interest income resulted from the
liquidation of investments to fund Project Sunburst. The weighted average
invested cash was $42.1 million and $218.8 million for the quarters ended
December 31, 2000 and 1999, respectively. The Authority invests in
investment-grade commercial paper having maturities of not more than six months
from the date of acquisition.
Interest expense for the quarter ended December 31, 2000 decreased by
$8.0 million, or 56.8%, to $6.1 million from $14.0 million for the quarter ended
December 31, 1999. Included in interest expense for the quarter ended December
31, 2000 is a net loss of $1.5 million due to the change in the fair value of
the Authority's derivative instruments. This decrease in interest expense was
attributable mainly to lower average debt outstanding and increased
capitalization of interest related to Project Sunburst, partially offset by a
higher average interest rate. Capitalized interest was $7.2 million for the
quarter ended December 31, 2000 compared to $1.1 million for the quarter ended
December 31, 1999. The weighted average interest rate for the quarter ended
December 31, 2000 was 8.42%, compared to 8.38% for the quarter ended December
31, 1999. The weighted average outstanding debt was $504.8 million for the
quarter ended December 31, 2000, compared to $517.3 million for the quarter
ended December 31, 1999.
Loss from discontinued operations associated with the conversion of the
bingo hall into the Hall of the Lost Tribes smoke-free slot machine venue for
the quarter ended December 31, 2000 decreased by $74,000, or 27.8%, to $192,000
from $266,000 for the quarter ended December 31, 1999.
Net income for the quarter ended December 31, 2000 increased by $15.1
million, or 99.3%, to $30.2 million from $15.2 million for the quarter ended
December 31, 1999. This increase is due primarily to an increase in operating
income and a decrease in interest expense as more fully described above.
Liquidity, Capital Resources and Capital Spending
As of December 31, 2000, the Authority held cash and cash equivalents of
$68.5 million, a decrease of $47.2 million, or 40.8%, from $115.7 million as of
September 30, 2000. The decrease is attributable mainly to the
26
decrease in investments held at December 31, 2000 due to the liquidation of the
investments for construction payments. Cash provided by operating activities was
$49.4 million for the quarter ended December 31, 2000 compared to cash provided
by operating activities of $16.3 million for the same period in the prior year.
During fiscal year 2000, the Authority tendered $90.0 million of Subordinated
Notes using the defeasance trust asset established in fiscal year 1999, for the
sum of $140.3 million, including all accrued and deferred interest on December
31, 1999.
Operating activities are the principal source of the Authority's cash
flows. The principal application of these funds was capital expenditures
incurred in connection with the construction and development of Project Sunburst
and other real property improvements. While the Authority does not believe that
there is any trend or a likelihood of an event that would adversely impact the
level of cash generated by its activities, there are numerous potential factors
which may cause a substantial reduction in the amount of cash flow, including,
but not limited to, the following:
. downturn in the economy and lack of consumer confidence, which would
result in reduced spending on discretionary items such as gaming
activities;
. substantial cost overruns in connection with completion of Project
Sunburst;
. operating expenses increasing at a greater rate than revenue; and
. increased competition in the gaming industry, or the legalization of
gaming activities in the State of Connecticut, which may result in a
substantial decrease in revenue.
In addition to cash generated by operating activities, the Authority has
relied on external sources of liquidity to meet its operating and investing
requirements.
External Sources of Liquidity
Bank Credit Facility. On March 3, 1999, the Authority entered into a
syndicated $425.0 million reducing, revolving, collateralized Bank Credit
Facility, with a syndicate of lenders led by Bank of America N.A. (formerly
known as Bank of America National Trust and Savings Association), which will
mature in 2004. The Authority plans to draw on the Bank Credit Facility
primarily in connection with the major expansion of Mohegan Sun, known as
Project Sunburst, and other capital expenditures. The Bank Credit Facility
agreement provided the Authority the right to arrange for increases in the Bank
Credit Facility to an aggregate amount of $500.0 million within two years
subsequent to the closing. In November 1999, the Bank Credit Facility was
increased to $459.5 million. In November 2000, the Authority exercised its right
to increase the Bank Credit Facility to $500.0 million. The Bank Credit Facility
is collateralized by a lien on substantially all of the Authority's assets, by a
leasehold mortgage on the land and improvements, which comprise Mohegan Sun and
by each of the Authority's operating accounts. As of December 31, 2000, there
were no borrowings outstanding on the Bank Credit Facility.
At the Authority's option, each advance of loan proceeds will accrue
interest on the basis of a base rate or on the basis of a one-month, two-month,
three-month or six-month London Inter-Bank Offered Rate ("LIBOR"), plus, in
either case, the applicable spread (based on the Authority's Total Leverage
Ratio as defined in the Bank Credit Facility agreement). Interest on each LIBOR
loan that is for a term of three months or less shall be due and payable on the
last day of the related interest period. Interest on each LIBOR loan that is
for a term of more than three months is due and payable on the date that is
three months after the date such LIBOR loan was made and every three months
thereafter and on the last day of the interest period. Interest on each base
rate loan shall be due and payable quarterly in arrears.
Pursuant to the terms of the Bank Credit Facility, the commitment (or
the maximum amount that may be borrowed under the Bank Credit Facility) will be
reduced automatically as of the earlier of March 31, 2002 or the last full day
of the first full quarter following the completion date of Project Sunburst, and
on the last day of each fiscal quarter thereafter, by 10% of the commitment as
in effect immediately prior to the first such reduction. The Authority has
entered into certain hedging transactions effective October 1, 2000 and January
2, 2001, to mitigate against the exposure to interest rate fluctuations on the
Bank Credit Facility.
The Bank Credit Facility contains various provisions that require the
Authority to maintain specified financial ratios. If the Authority's revenues
decline due to economic or competitive factors, it is possible that these
financial
27
ratios may be violated. If this were to happen, the Authority would not be able
to borrow additional funds under the Bank Credit Facility and it may even result
in an event of default, which could accelerate the payment of any outstanding
balance. In addition, while the Authority has entered into some hedging
transactions to mitigate against its exposure to interest rate fluctuations on
the Bank Credit Facility, the majority of the outstanding balance is subject to
interest rate fluctuations. It is possible that interest rates will start to
increase, which would mean that the Authority's interest cost may increase
significantly. A substantial increase in interest expense could have a negative
effect on the Authority's liquidity. For a further discussion on hedging
transactions that mitigate against this exposure, see "Quantitative and
Qualitative Disclosure of Market Risk" and Note 4 to the Authority's financial
statements.
In addition to the financing provided by the Senior Notes, Senior
Subordinated Notes and the Bank Credit Facility, the Tribe has set aside, with a
trustee, a $40.0 million, fully-funded construction reserve account that, in
certain circumstances, may be used to pay costs in excess of the Project
Sunburst budget.
Capital Expenditures
Capital Expenditures Incurred to Date. Capital expenditures totaled
$141.2 million, including capitalized interest, for the quarter ended December
31, 2000, versus $53.7 million for the same period in the prior year. These
capital expenditures were an aggregate of the following:
. Cumulative Project Sunburst construction expenses totaled $409.9
million, including $17.6 million in capitalized interest, through
December 31, 2000. During the quarter ended December 31, 2000,
expenditures totaled $134.6 million, including $7.2 million in
capitalized interest, versus $34.0 million, including $1.1 million
in capitalized interest, for the quarter ended December 31, 1999.
. Property maintenance capital expenditures for furniture, fixtures
and equipment totaled $4.8 million and $3.3 million for the quarters
ended December 31, 2000 and 1999, respectively.
. Employee parking center capital expenditures totaled $1.2 million
and $12.0 million for the quarters ended December 31, 2000 and 1999,
respectively. Cumulative expenditures on the employee parking center
have totaled $24.8 million through December 31, 2000.
. Utility enhancement capital expenditures totaled $624,000 and $4.4
million for the quarters ended December 31, 2000 and 1999,
respectively. Cumulative expenditures on utility enhancements have
totaled $17.6 million through December 31, 2000.
In keeping with standard practice in the construction industry, the
Authority retains a portion of the construction expenditures until satisfactory
completion of individual contracts. As of December 31, 2000, construction
retainage totaled $16.5 million, which has been included in construction
payables in the Authority's financial statements.
Expected future capital expenditures. During the remainder of fiscal
year 2001, the Authority expects to incur capital expenditures to total
approximately $598.4 million and to be allocated as follows:
. $20.2 million on maintenance capital expenditures.
. $496.6 million, excluding capitalized interest, on Project Sunburst
construction.
. $0.2 million on employee parking center expenditures.
. $20.0 million on conversion of the bingo hall into the Hall of the
Lost Tribes smoke-free slot machine venue.
. $17.4 million on utility enhancements.
. $2.0 million on an employee day care center.
28
. $42.0 million on an additional patron parking garage.
Project Sunburst
On October 13, 2000, the Tribal Council approved a formal resolution
increasing the expansion budget from $800.0 million to $960.0 million
(excluding capitalized interest, which will be paid from internally generated
funds). The Authority, in conjunction with the Tribe, increased the Project
Sunburst budget to $960.0 million for three reasons: (1) expected increases in
Project Sunburst labor costs because of the extremely competitive nature of the
Northeast construction labor market; (2) enhancements to project scope such as
an increase in the number of slot machines scheduled to be placed on the gaming
floor; and (3) quality improvements to the hotel and public areas. As a result
of the increase to the Project Sunburst budget, the Authority anticipates
seeking to issue an additional $150.0 million of subordinated notes or a term
loan. The remainder of the increase will be funded through internally generated
funds.
As of December 31, 2000, cumulative capitalized interest for Project
Sunburst construction expenses totaled $17.6 million. Capitalized interest for
the quarters ended December 31, 2000 and 1999 totaled $7.2 million and $1.1
million, respectively.
During fiscal year 1998, the Authority finalized contract negotiations
with TCA for Project Sunburst ("Development Agreement"). Under the Development
Agreement, TCA will oversee the planning, design and construction of the
expansion at Mohegan Sun and will receive a development fee of $14.0 million for
such services. As of December 31, 2000, the TCA has earned $5.5 million of the
development fee of which $4.9 million has been paid. The Authority has incurred
$588,000 and $1.4 million, respectively, for the quarters ended December 31,
2000 and 1999 related to the development fee.
Sources of funding for capital expenditures. The Authority will rely
primarily on cash generated from its operations and amounts available to be
drawn under the Bank Credit Facility to finance these capital expenditures.
However, the Authority's ability to finance sufficiently the anticipated capital
expenditures from these sources depends on its ability to maintain a stable
level of cash generation from its operations and it ability to draw down on the
Bank Credit Facility.
Other Property Enhancements
The Authority commenced construction of an electrical and water system
infrastructure ("Infrastructure Improvements"), estimated to cost $35.0 million,
that will service Mohegan Sun and other facilities. The Infrastructure
Improvements provide the most efficient manner of handling the increased utility
demands of the expanded facility that are attributable to the Project Sunburst
expansion. The construction was funded by the Authority, and is expected to be
complete concurrent with the opening of Project Sunburst. As of June 30, 2001,
approximately $23.7 million has been incurred in connection with construction of
the Infrastructure Improvements and $10.2 million of these assets were placed in
service. Infrastructure Improvement spending for the final quarter of fiscal
year 2001 is anticipated to be $11.3 million.
The Authority, in conjunction with the Project Sunburst expansion,
commenced construction on the Employee Parking Center in March 1999. The
Employee Parking Center includes 2,700 parking spaces and amenities such as a
dry cleaning service, on-site banking, an employee computer/training center
and a 15,000 square foot exercise facility. The Employee Parking Center opened
in June 2000. The total cost of the Employee Parking Center was $24.9 million.
The Employee Parking Center was completed in January 2001.
The Tribe commenced construction of a Public Safety Facility in December
1999, within the Eagleview complex, that will service the Mohegan Reservation.
Construction was funded initially by the Authority and subsequently reimbursed
by the Tribe. Approximately $5.9 million has been incurred and reflected as
amounts due from Tribe in the Authority's balance sheet as of December 31, 2000.
Relinquishment Agreement
Under the terms of the Relinquishment Agreement, TCA continued to manage
Mohegan Sun under the Management Agreement until January 1, 2000, when the
Management Agreement terminated, and the Authority assumed day-to-day management
of Mohegan Sun. As a result of the termination of the Management Agreement, the
Authority has agreed to pay to TCA five percent of gross revenues (as defined in
the Relinquishment Agreement) generated from Mohegan Sun, including Project
Sunburst, beginning January 1, 2000 and ending December 31, 2014. The Authority
refers to these payments as the relinquishment payments. The Authority initially
recorded a relinquishment liability of $549.1 million in September 1998. The
present value of this liability is estimated at $676.4 million as of December
31, 2000. The Authority reassesses the relinquishment liability when necessary
to account for material increases or decreases in projected revenues and
quarterly to reflect the impact on the time value of money due to the passage of
time. See Note 8 to the Authority's financial statements. The Authority has
capitalized $130.0 million of the relinquishment liability associated with the
trademark value of the Mohegan Sun brand name. In October 2000, the Authority
paid $5.5 million in relinquishment payments, of which $2.6 million represents
principal amounts and the remaining $2.9 million is payment for the accretion of
interest. As of December 31, 2000, relinquishment payments earned but unpaid
were $15.6 million. There were no relinquishment payments during the quarter
ended December 31, 1999.
29
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Distributions to the Tribe
During the quarters ended December 31, 2000 and 1999, the Authority
distributed $10.0 million and $10.2 million, respectively, to the Tribe.
Debt Service Costs
For the quarters ended December 31, 2000 and 1999, the Authority
incurred the following debt service costs (in thousands):
For the Quarter For the Quarter
Ended December 31, 2000 Ended December 31, 1999
----------------------- -----------------------
(restated -
see note 9 to the
Authority's
financial
statements)
$200M 8.125% Senior Notes $ 4,063 $ 4,063
$300M 8.75% Senior Subordinated Notes 6,562 6,562
Financing fees 980 -
Capital lease obligations 112 367
$50M Subordinated Notes - 2,648
$40M Subordinated Notes - 1,473
Change in fair market value of derivative instruments 1,497 -
Capitalized interest (7,160) $ (1,085)
--------------------- ---------------------
Total Interest Expense $ 6,054 $ 14,028
===================== =====================
Sufficiency of Resources
The Authority believes that existing cash balances, financing
arrangements and operating cash flow will provide the Authority with sufficient
resources to meet its existing debt obligations, relinquishment payments,
distributions to the Tribe and foreseeable capital expenditure requirements with
respect to current operations and Project Sunburst for at least the next twelve
months. Nonetheless, as discussed above, there are potential events or
occurrences that may affect adversely the Authority's ability to meet its
existing debt obligations, make relinquishment payments and distributions to the
Tribe and pay for capital expenditures.
Contractual Obligations and Commitments
The Authority's future payment obligations related to its material debt
and certain other contractual obligations and the timing of those payments are
set forth below. Since many of these payment amounts are not fixed, the amounts
in the table below are solely estimates as more fully described in the footnotes
and the actual amounts may be different.
Contractual Obligations Fiscal Year
(in thousands) 2001 (1) 2-3 years 4-5 years After 5 years
---------------------------------------------------------------------------------------------
Long-term debt (2) $ - $ - $ - $ 500,000
Construction obligations (3) 665,820 141,671 - -
Development obligations (4) 9,282 4,718 - -
----------- ---------- --------- ----------
Total $ 675,102 $ 146,389 $ - $ 500,000
=========== ========== ========= ==========
(1) Amounts due within one year represent obligations expected to be
incurred from October 1, 2000 to September 30, 2001.
30
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Long-term debt includes scheduled amortization and scheduled
maturities for notes payable and credit facilities, but excludes
interest payments.
(3) Construction obligations represent the remainder of expenditures
the Authority must pay in connection with Project Sunburst and
related construction enhancements. See Note 7 to the Authority's
financial statements. The Authority does not believe that it will
have any construction obligations after September 30, 2002, and
this table has been prepared based on that assumption.
(4) Under the Development Agreement, the Authority is required to pay
to TCA a development fee of $14.0 million. Development
obligations represent the remainder of the fee due to TCA. See
Note 8 to the Authority's financial statements. The Authority
does not believe that it will have any development fee
obligations after September 30, 2002, and this table has been
prepared based on that assumption.
In addition to the contractual obligations described above, the
Authority has certain other contractual commitments that will require payments
throughout the periods described below. The calculation of the estimated
payments in the table below are based, in large part, on projections of future
revenues over an extended period of time, as well as other factors which are
indicated more fully in the footnotes to the following table. Since there is a
high level of estimates and judgments used with respect to calculating these
liabilities, future events that affect such estimates and judgments may cause
the actual payments to differ significantly from the estimates set forth below.
The amounts included in the table below are estimates and, while some of these
agreements are perpetual in term, for the purposes of calculating these amounts,
the Authority has prepared the information in this table for only ten years.
Contractual Commitments Fiscal Year
(in thousands) 2001 (1) 2-3 years 4-5 years 5-10 years
----------------------------------------------------------------------------------------------------
Slot winning payment commitments (2) 144,589 373,009 408,682 1,150,391
Relinquishment commitments (3) 42,899 119,017 133,810 376,658
--------------------------------------------------------
Total $187,488 $492,026 $542,492 $1,527,049
========================================================
(1) Amounts due within one year represent payment commitments from
October 1, 2000 to September 30, 2001.
(2) Slot winning payment commitments are a portion of the revenues
earned on slot machines that must be paid by the Authority to the
State of Connecticut pursuant to the Mohegan Compact. The payment
commitment is the lesser of (a) 30% of gross revenues from slot
machines, or (b) the greater of (i) 25% of gross revenues from
slot machines or (ii) $80.0 million. For the fiscal years ended
September 30, 2000 and 1999, the Slot Win Contribution totaled
$135.1 million and $121.1 million, respectively. The amounts
shown in this table are estimates of the required payments for
the next ten years.
(3) Relinquishment commitments represent payment commitments of the
Authority to TCA under the Relinquishment Agreement as described
in Note 8 to the Authority's financial statements. The
relinquishment commitment is calculated as five percent of
revenues, as defined in the Relinquishment Agreement. The amounts
shown in this table are estimates of the required payments for
the next ten years and have been calculated in accordance with
the Relinquishment Agreement. See Note 8 to the Authority's
financial statements.
Critical Accounting Policies and Estimates
Management has identified the following critical accounting policies
that affect the Authority's more significant judgments and estimates used in the
preparation of the Authority's financial statements. The preparation of the
Authority's financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Authority's
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, management evaluates
those estimates, including those related to asset impairment, accruals for
Player's Club points, self-insurance, compensation and related benefits, revenue
recognition, allowance for doubtful accounts, contingencies and litigation. The
Authority states these accounting policies in the notes to the financial
statements and in relevant sections in this discussion and analysis. These
estimates are based on the information that is currently
31
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
available to the Authority and on various other assumptions that management
believes to be reasonable under the circumstances. Actual results could vary
from those estimates.
The Authority believes that the following critical accounting policies
affect significant judgments and estimates used in the preparation of its
financial statements.
One of the most significant policies used by the Authority relates to
its estimate of its relinquishment liability. The Authority, in accordance with
Statement of Financial Accounting Standards No. 5 "Accounting for
Contingencies", has recorded a relinquishment liability of the estimated present
value of its obligations under the Relinquishment Agreement. The Authority
reassesses the relinquishment liability when necessary to account for material
increases or decreases in projected revenues and quarterly to reflect the impact
on the time value of money due to the passage of time. See Note 8 to the
Authority's financial statements. Since there is a high level of estimates and
judgments used with respect to calculating this liability, future events that
affect such estimates and judgments may cause the actual liability to differ
significantly from the estimate.
The Authority recognizes revenue as net wins and losses occur in the
casino and upon delivery of food, beverage and other services.
The Authority maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments, which results in bad debt expense. Management determines the adequacy
of this allowance by continually evaluating individual customer receivables,
considering the customer's financial condition, credit history and current
economic conditions. If the financial condition of customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
The Authority maintains accruals for workers compensation
self-insurance and Player's Club point redemption, which are classified in other
accrued liabilities in the accompanying balance sheets. Management determines
the adequacy of these accruals by periodically evaluating the historical
experience and projected trends related to these accruals. If such information
indicates that the accruals are overstated or understated, the Authority will
adjust the assumptions utilized in the methodologies and reduce or provide for
additional accruals as appropriate.
The Authority is subject to various claims and legal actions in the
ordinary course of business. Some of these matters relate to personal injuries
to customers and damage to customers' personal assets. Management estimates
guest claims expense and accrues for such liability based upon historical
experience in the accounts payable and accrued expenses category in its
accompanying balance sheets.
Impact of Inflation
Absent changes in competitive and economic conditions or in specific
prices affecting the hotel and casino industry, the Authority does not expect
that inflation will have a significant impact on its operations. Changes in
specific prices, such as fuel and transportation prices, relative to the general
rate of inflation may have a material adverse effect on the hotel and casino
industry in general.
Item 3. Quantitative and Qualitative Disclosure of Market Risk.
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. The Authority's primary exposure to market risk is interest
rate risk associated with its $500.0 million Bank Credit Facility in which
interest will accrue on the basis of a base rate formula or a LIBOR-based
formula, plus applicable spreads. See Note 4 to the Authority's financial
statements for further details relating to the terms and conditions of the Bank
Credit Facility. As of December 31, 2000, no amounts had been drawn under the
Bank Credit Facility. On January 3 and January 25, 2001, the Authority drew
$15.0 million and $40.0 million, respectively, on the Bank Credit Facility in
connection with Project Sunburst. The Authority uses derivative instruments,
including an interest rate cap, interest rate collar and an interest rate swap
as its strategy to manage interest rate risk associated with the variable
interest rates applicable to advances under the Bank Credit Facility.
The following table provides information about the Authority's
derivative instruments at December 31, 2000:
32
Notional Estimated
Maturity Date Value Fair Value
------------- -------- ----------
Interest Rate Cap
Strike Rate - 8% October 1, 2003 $2,647,400 $ 10,000
Interest Rate Collar
Ceiling Strike Rate - 8%
Floor Strike Rate - 6% March 1, 2004 451,267 (777,632)
Interest Rate Swap
Pay fixed - 6.35%
Receive Variable March 1, 2004 225,633 (448,124)
---------- ----------
Total $3,324,300 ($1,215,756)
========== ==========
All derivative instruments are based upon one-month LIBOR, which was
6.56% on December 31, 2000.
33
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit Index filed herewith is incorporated herein by reference.
(b) Reports on Form 8-K
None.
34
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOHEGAN TRIBAL GAMING AUTHORITY
Date: November 12, 2002 By: /s/ Mark F. Brown
----------------------------------------
Mark F. Brown
Chairman, Management Board
Date: November 12, 2002 By: /s/ William J. Velardo
----------------------------------------
William J. Velardo
President and Chief Executive Officer
Date: November 12, 2002 By: /s/ Jeffrey E. Hartmann
----------------------------------------
Jeffrey E. Hartmann, Executive Vice
President Finance/Chief Financial Officer
(Principal Financial and Accounting Officer)
35
CERTIFICATION
I, William J. Velardo, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of the
Mohegan Tribal Gaming Authority;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
Date: November 12, 2002 /s/ William J. Velardo
---------------------------
William J. Velardo
President and Chief Executive Officer
36
CERTIFICATION
I, Jeffrey E. Hartmann, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of the
Mohegan Tribal Gaming Authority;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
Date: November 12, 2002 /s/ Jeffrey E. Hartmann
---------------------------
Jeffrey E. Hartmann
Executive Vice President, Finance and
Chief Financial Officer
37
Exhibit Index
Exhibit
No. Exhibit Description
3.1 Constitution of the Mohegan Tribe of Indians of Connecticut (filed as
Exhibit 3.1 to the Registration Statement on Form S-1, File No.
33-80655, filed with the SEC on December 21, 1995 (the "1996 Form S-1"),
and incorporated by reference herein).
3.2 Ordinance No. 95-2 of the Tribe for Gaming on Tribal Lands, enacted on
July 15, 1995 (filed as Exhibit 3.2 to the 1996 Form S-1 and
incorporated by reference herein).
4.1 Relinquishment Agreement dated February 7, 1998 by and among the Mohegan
Tribal Gaming Authority, The Mohegan Tribe of Indians of Connecticut and
Trading Cove Associates (filed as Exhibit 10.14 to Form 10-K for the
Authority's fiscal year ended September 30, 1998, File No. 33-80653, and
incorporated by reference herein).
4.2 Indenture dated March 3, 1999 among the Mohegan Tribal Gaming Authority,
the Mohegan Tribe of Indians of Connecticut and First Union National
Bank, as Trustee, relating to the 8 1/8% Senior Notes Due 2006 of the
Mohegan Tribal Gaming Authority (filed as Exhibit 4.3 to Registration
Statement on Form S-4, File No. 333-76753, filed with the SEC on April
21, 1999 (the "1999 Form S-4"), and incorporated by reference herein).
4.3 Form of Global 8 1/8% Senior Note Due 2006 of the Mohegan Tribal Gaming
Authority (contained in the Indenture filed as Exhibit 4.3 to the 1999
Form S-4 and incorporated by reference herein).
4.4 Senior Registration Agreement dated March 3, 1999 among the Mohegan
Tribal Gaming Authority, Salomon Smith Barney Inc., NationsBanc
Montgomery Securities, LLC, SG Cowen Securities Corporation, Bear,
Sterns & Co. Inc., BankBoston Robertson Stephens Inc. and Fleet
Securities, Inc. (filed as Exhibit 4.5 to the 1999 Form S-4 and
incorporated by reference herein).
4.5 Indenture dated as of March 3, 1999 among the Mohegan Tribal Gaming
Authority, the Mohegan Tribe of Indians of Connecticut and State Street
Bank and Trust Company, as Trustee, relating to the 8 3/4% Senior
Subordinated Notes Due 2009 of the Mohegan Tribal Gaming Authority
(filed as Exhibit 4.6 to the 1999 Form S-4 and incorporated by reference
herein).
4.6 Form of Global 8 3/4% Senior Subordinated Notes Due 2009 of the Mohegan
Tribal Gaming Authority (contained in the Indenture filed as Exhibit 4.6
to the 1999 Form S-4 and incorporated by reference herein).
4.7 Senior Subordinated Registration Agreement dated March 3, 1999 among the
Mohegan Tribal Gaming Authority, Salomon Smith Barney Inc., NationsBanc
Montgomery Securities LLC, SG Cowen Securities Corporation, Bear,
Stearns & Co. Inc., BankBoston Robertson Stephens Inc. and Fleet
Securities, Inc. (filed as Exhibit 4.8 to the 1999 Form S-4 and
incorporated by reference herein).
10.1 Amendment No. 1 to the Loan Agreement dated as of November 30, 2000 by
and among the Mohegan Tribal Gaming Authority, the Mohegan Tribe of
Indians of Connecticut and Bank of America National Trust and Savings
Association (filed by the Authority with its Form 10-K for the fiscal
year ended September 30, 2000 and incorporated by reference herein).
99.1* Certification of President and Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2* Certification of Executive Vice President, Finance and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
38
*Filed herewith.
39